Nandita Da Cunha: Survival strategy for media firms

With growth no longer assured, media needs new solutions

And now the times are a changin’…

Circa early 2008: The Indian media and entertainment (M&E) industry was in an elated state. Ad-spends had been growing at an impressive 20 per cent per annum for the past two years, and the expectations of future growth were optimistic. Introduction of new digital technologies in television and film distribution were boosting subscription revenues. The industry was rife with significant business activities in terms of mergers, acquisitions, expansion into new geographies, genres and media. There was a tremendous global interest in the Indian market with global M&E leaders like Walt Disney, NBC Universal, Viacom, Conde Nast, establishing their presence.

Circa early 2009: The global economy looks to be heading towards a slow and prolonged recession. The GDP growth forecast for India has been revised downward. A direct impact will be on the planned ad-spends by companies in India. Ad-spends growth (on which the sector is highly dependent), which was at around 18-19 per cent per annum for 2005-07 period, is estimated to be about 12 per cent in 2008 and around 7-8 per cent in 2009. At the same time, for an individual player, increased complexities have emerged on account of greater fragmentation of audiences across media, and distribution platforms, and greater need for accountability demanded by advertisers.

The graph here indicates the reduction in Profit After Tax (PAT) margins in the second quarter of the financial year 2009, as compared to second quarter of the financial year 2008. While the strongest impact of the economic slowdown would be more pronounced in the third quarter comparisons, the graph gives a broad indication of things to come.  

The attractiveness of the Indian M&E industry has resulted in a number of new entrants over the past two years. Reputed companies such as Viacom, NDTV, UTV and INX Media have heavily invested in their broadcast offerings. There has been a spate of joint ventures and geographic diversifications in print media, with prominent international brands establishing their presence, with the local leaders like BCCL, HT Media and Deccan Chronicle (DC) entering newer geographies. Print media is also facing competition from TV and radio. Competition has also increased significantly in radio with large companies like Reliance ADAG, Sun Group, BCCL, Hindustan Times, establishing a strong presence.

This has adversely affected the margins of the players due to a strong increase in demand, and hence cost, of content, distribution, personnel and marketing, and fragmentation of ad revenues. 

The credit crunch and the increase in the cost of capital has forced many players to postpone their expansion plans. A more likely scenario is that large cash -rich companies may make strategic acquisitions to enhance their overall portfolio. 
 

In the broadcasting industry, the carriage fee market has doubled over the last year, and these current levels are anticipated to remain the same or reduce marginally till 2011, especially in light of new entrants in the broadcasting industry and limited availability of distribution bandwidth (even on DTH). Even in the print industry, competitive intensity has resulted in a need to establish a stronger presence on news-stands and point-of-sale. 
 

Content costs for broadcasting have been going up due to increased competition and relative scarcity of organised and professional players that score high on quality. The print industry, on the other hand, has been exposed to high global newsprint rates, which have held up despite the looming economic crisis. These costs constitute a significant portion of the cost structure of a broadcasting and print player, respectively.

The effect of this margin squeeze is already being witnessed by the industry players who have responded by adopting short-term measures which yield immediate savings. There have been multiple news-reports of significant lay-offs, closure of offices/channels in loss-making geographies, pay-cuts, hiring freeze and other short-term internal cost-cutting measures by various players. Delays in expansion plans and re-runs of some popular shows are also being increasingly adopted by the broadcasters, while players in print media are cautious about introducing new editions. While this quick finger-pointing to some obvious cost areas will result in immediate relief, are these more damaging in the long-term, when the economy improves? The Indian M&E players need to introspect — given the current market scenario and my relative position, is my strategic imperative surviving the downturn, resorting to cost-reduction or performance enhancement?

Given the current situation, players in the industry could look at a strategy that takes into account the condition in their respective operating markets, and their own financial robustness. The graphic provides a broad overview of strategies that can be adopted by various players:

While in the past 3-4 years, M&E players have significantly expanded their toplines by entering and growing in various markets, now is the time to bring in efficiencies. Players who have so far been driven by the “revenue-growth” are likely to have a new focus word — “performance-enhancement”. This can be achieved by various strategic initiatives that can potentially enhance the performance of resources resulting in higher profitability. 

Developing a programming/content strategy that delivers a higher Return on Investment to media-buyers by targeting specific audiences. 
 

Real-time ad-inventory management by partnering across media for barter of ad-inventories and by ensuring maximum sale. For instance, online media trading portal by Dentsu enables media companies to sell ad-inventory till the last minute. 
 

Innovations in distribution channels, targeting key destinations. 
 

Increasing the focus of regional marketing, by associating with local media and events. 
 

Streamlining the production process for films and TV programmes. 
 

Exploring profitable means of monetising content by using internet and mobile media. 
 

Using of digital prints in film distribution to ensure simultaneous release and reducing piracy. 
 

Converting fixed costs to variable costs by outsourcing non-core activities. 
 

IT consolidation and application rationalisation. 
 

Creating shared services.

Some other key initiatives include organisational redesign (like employee compensation and metrics, redefining the reporting structures), working capital management, and so on.

If one takes a long-term view of the industry, it is apparent that media companies need to collaborate with their brethren in the communications, high- tech and software industries to forge innovative business models that are based on an open collaborative model.

While the current economic downturn has pushed many M&E companies into survival mode, it is important to note that through the decades, the winning combination has been, and will continue to be, great content, lean operations and great leaders at the helm of company affairs.

The author is Associate Director, KPMG